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Introduction to Mergers & Amalgamations
Amrish Shah
ICAI – WIRC Seminar
February 2013
Content► Modes of M&A in India
► Amalgamation and Merger – Basic concept
► Type of mergers
► Key driver for mergers
► Domestic mergers
► Cross border mergers
► Key regulations governing mergers
Introduction to AmalgamationsPage 2
► Case studies
Modes of M&A in India
Overview - Modes of M&A in India
M&AM&A
Merger / DemergerMerger / DemergerAcquisitionsAcquisitionsInternal
RestructuringInternal
Restructuring
Introduction to AmalgamationsPage 4
Business PurchaseBusiness Purchase
Financial restructuring/
Enhancing stake/repatriation
Enhancing stake/repatriation
Focus on core business /hive-off of non core
business /monetize
Consolidation of businesses /
entities
Focus on inorganic growth /strategic or non
strategic investments
Focus on core business /sell off
non core business
DemergerDemergerBuybackBuybackShare
PurchaseShare
Purchase
Slump Sale / Itemised SaleSlump Sale / Itemised Sale
Capital Reduction
Capital Reduction
AmalgamationAmalgamation
Merger / Amalgamation - Basic concept
What do you mean by merger / amalgamation?► Merger refers to consolidation of two or more entities
► Involves transfer of assets and liabilities from one or more transferor companies to a transferee company
► In consideration, typically the transferee company issues shares to the shareholders of transferor company
► Consideration could be in any “form” – However, considering tax neutrality conditions the same is discharged by way of issue of shares
Key difference between “Merger” and “Amalgamation” in India
Introduction to AmalgamationsPage 6
Merger – “combination of two or more enterprises whereby the assets and liabilities of one are vested in the other, with the effect that the former enterprise loses its identity”
Key difference between “Merger” and “Amalgamation” in India
Amalgamation – “combination of two corporate entities where the assets and liabilities of both are vested in a third entity, with the effect that both former entities lose their identities to form a new entity”
Terms merger and amalgamation appear synonymous, th ere is a difference between two – All amalgamations are necessarily merger, but all merge rs may not necessarily be amalgamation
Types of Merger / Amalgamation ► Cogeneric mergers
► Mergers takes place between companies operating in same industry
► Further classified into:
► Horizontal merger – Merger take place between companies engaged in same business activities
► Vertical merger – Merger take place between companies which are engaged in different functions within same business activities
► Conglomerate mergers
Page 7 Introduction to Amalgamations
► Merger takes place between companies operating in different industry
► Other type of mergers
► Up-stream merger – Subsidiary company is merged with its Parent company
► Down-stream merger – Parent company is merged with its Subsidiary company
► Reverse merger – Sound financial company is merged with loss making company or unlisted company is merged with listed company to get automatic listing
Merger / Amalgamation – Key drivers
Rationale for business consolidation
► Acquisitions
► Consolidation of operations – to exploit synergy
► Develop focused brand image/ stronger market standing through single flagship entity
► Tax savings
► Fund constraint
► Eliminate multiple layers of holding
► Eliminate no. of companies
Page 8 Introduction to Amalgamations
flagship entity
► Takeover of sick company
► Consolidation of Promoter holdings
in group
► Balance sheet right sizing
► Automatic listing of Co –Reverse Merger
► SEBI TOC compliance
Domestic merger / amalgamation situations
Company A Company B
Shareholders Shareholders ShareholdersShareholders
Merger of Companies A & B with Company C
Consideration in the form of shares of Company B
Consideration in the form of shares of Company C
Merger of Company A with Company B
Company A Company B Company CMerger
Merger
Introduction to AmalgamationsPage 9
SUB Co
HOLD Co
SUB Co
HOLD Co
Merger of SUB Co with HOLD Co
No shares to be issued by HOLD Co
Consideration in the form of shares of SUB Co
Shareholders
Merger of HOLD Co with SUB Co
100%100%
Cross border merger situations
F CO 1 F CO 2
Shareholders
F CO
INDIA
I CO
Shareholders
I CO
OUTSIDE INDIA
Merger of F CO 1 (holding I CO) with F CO 2 Merger o f F CO with I CO
Consideration in the form of shares of F CO 2 Consideration in the
form of shares of I CO
INDIA
OUTSIDE INDIA
Merger
Introduction to AmalgamationsPage 10
I CO I CO
F CO
INDIA
I CO
OUTSIDE INDIA
Shareholders
Merger of I CO with F CO
Extant company law provisions do not allow this form of merger *
*However Companies Bill 2012 proposes to allow such mergers subject to certain approvals
Consideration in the form of shares of F CO
Key regulatory reactions on mergers
Key regulations
Income tax
► Tax neutrality
► Availability of tax exemptions
► Transfer of tax credits
► Step up in tax basis
Companies Act
► High Court approval
► Approval of shareholders and creditors
► Post implementation procedures
SEBI & Stock exchange
► Listing of shares / New Co
Stamp duty
► Valuation of shares
► Indian Stamp Act vs. State Stamp Act
► Valuation of immovable property
► Set-off of stamp duty
Exchange control
► Issue of shares to non resident
Introduction to AmalgamationsPage 11
► Listing of shares / New Co
► Stock exchange approvals
► Take over code implications
► Filing compliances
► Issue of shares to non resident on merger
► FDI / RBI – Approval / automatic route
Other regulations
► Competition Act
► Indirect tax
► Accounting
► Industry specific law
Cross border
► Host jurisdiction compliances
► Tax implications in host juridiction
Accounting
► Method of accounting
► Pooling of interest
► Purchase method
► Expense accouting
► Cancellation of investment
Glossary
Glossary
AIM Alternative Investment Market
Co Company
DDT Dividend Distribution Tax
FDI Foreign Direct Investment
LSE London Stock Exchange
M&A Merger & Amalgamation
Introduction to AmalgamationsPage 13
NBFC Non Banking Financial Company
PE Private Equity
RBI Reserve Bank of India
SEBI Securities and Exchange Board of India
TOC Takeover Code
Thank You For further information / clarifications, please contact:
Amrish ShahPartner & Transaction Tax Leader Email : amrish.shah@in.ey.comPhone : +91 22 6192 0680
DisclaimerThis presentation contains information in summary form and is thereforeintended for general guidance only. It is not expected to be a substitute fordetailed research or the exercise of professional judgment. Accordingly,this presentation should neither be regarded as comprehensive norsufficient for the purposes of decision-making. Neither Ernst & Youngsufficient for the purposes of decision-making. Neither Ernst & YoungPrivate Limited nor any of its affiliates can accept any responsibility for lossoccasioned to any person acting or refraining from action as a result of anymaterial in this presentation. The information provided is not, nor is itintended to be an advice on any matter and should not be relied on as such.Professional advice should be sought before taking action on any of theinformation contained in it. Without prior permission of Ernst & Young, thisdocument may not be quoted in whole or in part or otherwise referred to inany documents.
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